About those tax statements you have seen or received on home “loans”

Answering your question requires tracing the convoluted strategy of the investment banks. 


Start with the proposition that each player is one of the separate business entities involved in the securities plan that claimed to “have” your loan in some manner, shape or form.

Next go to the fact that the creditor role was extinguished in the plan. That leaves the debt with nobody to pay (no creditor). Nobody has an asset on their balance sheet corresponding to your transaction that was originated as a “loan.” 


BUT you are making payments as directed by people whom you think are actually authorized to tell you where to make your payments. Those payments are sent to a company claiming to be a servicer. I’ll simply call them a receiver. So the receiver accepts the payments and then forwards money to someone (Investment Bank) who is the party from whom they accept instructions (although the instructions are actually received semi-anonymously from a third party intermediary). It’s like organized crime. The receiver keeps a portion of the payment as fees and turns over the balance. 


So the investment bank has received a payment from the receiver. It does not book the receipt of money from the servicer as interest income, return of principal or anything like that because the investment bank has no asset against which it could post such entries. So it posts it to a suspense account (with the label of the implied trust, which actually does not exist and therefore has no tax liability) that is neither income nor a reported asset, although it should be reporting the asset and an equal liability to pay it out if that was the case. This is simple double entry bookkeeping. But because of changes in GAAP that started in the 1960’s (See Unaccountable Accounting by Abraham Briloff) and were then accepted by both the Financial Accounting Standards Board and the SEC and therefore  by the IRS, these transactions are considered “off balance sheet” which is a fancy way of saying that they don’t actually report it even though it happened. 


Since there is no  bookkeeping entry as to income or expense there is no taxable event and nothing is reported to the IRS. And while payments are being made to investors (holders of certificates) by the investment bank (as “Master Servicer” on behalf of the implied “trust”) all of those payments are discretionary. 


And here is another place where it gets really complicated. Payments received from the servicer do account for most of the payments made to investors who bought certificates. But factually and legally those payments continue only as long as the investment bank wants to make them. The investment bank wants to make them only as long as it is selling certificates. (See Ponzi scheme). And in actuality the investment banks DO continue to make payments without regard to payments received from homeowners as long as they are keeping up the pretense that those payments are actually tied to the receipt of payments from “borrowers.” The goal is to sell more certificates. 


And in fact the structure of securitization in practice is such that if all homeowners stopped making payments, the investment banks would and do continue making payments — if they were still selling certificates. This actually happens where most of the loans were toxic assets. But in reality the investment banks could not continue to sell certificates if homeowners refused to pay. That would break the illusion of loan portfolios and it would be easy to see that the transactions with homeowners were not really loans because nobody ended up being a “lender” as defined under Federal and State lending laws. 


So what happens when a debt is discharged by bankruptcy? Answer nothing because nobody has it as an asset. It continues to get reported as if nothing had happened. the goal is maintain the pretense that the “loan portfolio” is operating and that “borrowers”. 
What happens when the trustee sale occurs? Answer nothing because nobody has it as an asset. It continues to get reported as if nothing had happened. the goal is maintain the pretense that the “loan portfolio” is operating and that “borrowers”. 


What happens when they sell the property using third party names? Answer nothing because nobody has it as an asset. It continues to get reported as if nothing had happened. the goal is maintain the pretense that the “loan portfolio” is operating and that “borrowers”. 

What happens with payments from homeowners that are reported as “interest” by the receiver/servicer? Answer nothing because nobody has it as an asset. It continues to get reported as if nothing had happened. the goal is maintain the pretense that the “loan portfolio” is operating and that “borrowers”. 


What happens with payments from homeowners that are reported as “principal” by the receiver/servicer? Answer nothing because nobody has it as an asset. It continues to get reported as if nothing had happened. the goal is maintain the pretense that the “loan portfolio” is operating and that “borrowers”. 


Having created a complex design that to most people is impenetrable the investment banks are now able to report anything they want for their own purposes. 


It doesn’t matter what the homeowner pays or doesn’t pay.
But they have algorithms to keep up appearances. Since those programs do not have access to any actual database, they create one what assumes, from the face value and terms of the origination loan documents, that you are paying and they send out a statement that says you paid interest on your loan. This provides the foot prints for tax evasion or avoidance. Having established nonexistent transactions as at least “reported” they can now write off the loan, take a loss and reduce their taxes. 


The interesting academic question that rises from all of this is that the whole thing is “tubular,” in my view. From the perspective the homeowner intended to make payments of interest when the homeowner was actually making payments on what the homeowner thought was a loan. It was certainly an obligation even if it wasn’t a loan, even if it might have been an unenforceable obligation for lack of consideration.

[More legal analysis: If it wasn’t a loan then the payment was in exchange for something from the homeowner — i.e., initiating and issuing instruments that started (or completed) the securitization process. If that was the consideration then was the consideration cancelled out by the homeowner/issuer’s required promise to make a payment that was more (with “interest”) than what the homeowner received?]


So from the homeowner’s perspective the payment was interest on an obligation and was not deductible unless it was an obligation arising from a homeowner “loan.” But from the investment bank’s perspective there is no interest, there is no principal. There is only cash flow to which they attach any label they want. It is my opinion that this is a major potential source of revenue for Federal and state governments who have income taxes. Because the investment banks are taking deductions without reporting the income. 


So all of this adds up to a very solid qui tam action under state and federal false claims act that cost governments money. The problem is political. Under direction from the executive branches, most dominated by politicians who have received vast amounts of money from investment banks who received vast amounts of money from investors and homeowners, so when qui tam actions are filed, the agency steps in and says “it’s ok, we were not defrauded. This is public policy to allow this.” End of Qui Tam. 

*Neil F Garfield, MBA, JD, 73, is a Florida licensed trial attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.*

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One Response

  1. Good analysis Neil.

    As I have said here before, I greatly regret always paying. I greatly regret not going to formal foreclosure – even if equity was lost. The consequence was much greater. Let me emphasize, despite my paying and bogus discharges/cancellations etc., internally, I am still recorded as in default. Nothing I can do to fix that. The path of the bread crumbs was eaten. It can’t be undone. Can’t say ‘whoops” – we made a mistake. It is done. So authority is based upon what? Too late – I acknowledged payment by paying. WRONG.

    I think investment banks long ago “dumped” toxic securities. Most tranches have been paid out. A few lower tranches remain, but they are only held in the hopes of some recovery by foreclosure. Trading is nil. Structures were set up to pass out the back door.

    There is no accounting from the onset. There is a cause for this, and no one addresses it.

    ‘Master Servicing” – as you may, has been largely been sold to REITs. So conversion from REMIC to REIT. Some claimed trusts even started out as a REIT. The REMICs had their own credit enhancement inherent in the claimed “trust” that was never compliant. REITs structure is different – it has derivatives.

    Bottom line — there is whole lot not told. But, disclosure would could cause Chaos. And, we have enough of that right now. No one will allow it. Not any political party will allow it. We are the SCAPEGOATS. There will be no retraction of that no matter who is in office.

    Qui Tam? No way if true disclosure is involved. Trillions of dollars, and too many involved in the scheme. Too many made millions and billion of dollars – even from the smallest “broker” – one of whom I know made millions. .

    I emphasize – I made a BIG mistake to pay. Huge mistake. I regret my actions. It is too late to fix that. .

    Peace and thanks to our veterans today. Brave people who stood up for us. Thank you to all of you who served our country.

    And, thanks to Neil, who stands up for the American people. May you also have a legacy.

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